Journal Article

Unraveling COVID-19-induced volatility spillover: A study of the dynamic interplay between NIFTY 50 spot and options markets

Gahlot, Ruchika, Puri, Neha, Malhotra, Kunal, Tokas, Nisha, Gupta, Himani

2025

Overview

This study unravels the transmission of volatility spillovers between NIFTY 50 spot prices and the options market, addressing a significant gap in existing studies. It captures how market connectedness evolved during the pre-COVID, COVID and post-COVID periods, offering fresh insights into price discovery and risk management during systemic shocks. The analysis applies the Dynamic Conditional Correlation-GARCH (DCC-GARCH) model to examine volatility spillovers and assess dynamic connectedness between NIFTY 50 spot prices and options. Furthermore, the Baruník and Krehlík (2018) and Diebold and Yilmaz (2012) models are employed for variance decomposition, providing insights into time-frequency connectedness and offering a detailed view of spillover effects across different time horizons.The findings reveal volatility spillovers between the NIFTY index and option markets across various moneyness levels (ATM, ITM, and OTM) during pre-COVID, COVID and post-COVID periods. The results show persistent long-run spillovers but no significant short-term effects. ATM and ITM options emerge as key volatility transmitters, while the NIFTY index acts as a net absorber, particularly during the COVID-19 crisis. A sharp rise in market connectedness is observed during COVID, which remained elevated in the subsequent period. The results hold important implications for option pricing, hedging and regulation. Persistent long-term spillovers emphasize the importance of models that account for time-varying risk across different moneyness levels. The surge in connectedness during the COVID-19 pandemic highlights the need for dynamic hedging strategies and stronger regulatory oversight, particularly in emerging markets. This study is among the first to analyze volatility spillovers between NIFTY 50 and the options market, with a specific focus on the COVID-19 pandemic.

• Publisher: Emerald,Emerald Group Publishing Limited,Emerald Publishing,한국파생상품학회
• Subject: Agricultural commodities / COVID-19 / Decision making / Derivatives / Diebold Yilmaz / Disease transmission / Futures market / GARCH / Generalized method of moments / Investigations / Investments / Investors / Literature reviews / Nifty 50 / Option market / Options markets / Portfolio diversification / Put & call options / Risk management / Securities markets / Securities prices / Spot market / Stochastic models / Stock exchanges / Volatility / Volatility spillover / 경영학